Analysis: Despite rate cut, Federal Reserve struggles to get policy right in new Trump era

In a landmark policy reversal, the Federal Reserve implemented its first interest rate cut of 2025 during the Sept. 16-17 Federal Open Market Committee (FOMC) meeting.

The FOMC lowered its federal funds target range to 4-4.25%, sending the stock market to record highs, while the bond market digested previous gains anticipating the rate cut, reported NBC News.

“Recent indicators suggest that growth of economic activity moderated in the first half of the year,” said the FOMC statement. “Job gains have slowed, and the unemployment rate has edged up but remains low. Inflation has moved up and remains somewhat elevated.”

The cut ends an eight-month freeze in monetary policy, which has been much-criticized by President Donald Trump. The president argued the labor market needs a reduction in interest rates to speed up hiring.

The conflict is part of a larger fight among economists, who are struggling with modeling how the Trump economy will play out. So far, mainstream economists represented by government bureaucrats and Wall Street have been often wrong and late in their analysis.

In August, Trump tagged Federal Reserve Chairman Jerome Powell “Jerome ‘Too Late’ Powell” for the Fed chief’s unwillingness to lower interest rates until it’s “too late” even as inflation remains tame and the employment situation softens.

“IF HE CONTINUES TO REFUSE [to cut rates], THE BOARD SHOULD ASSUME CONTROL, AND DO WHAT EVERYONE KNOWS HAS TO BE DONE!” Trump said on Truth Social in August, lobbying that Powell should be fired.

Inflation data in August saw price increases pacing at an annual rate of 2.9% – above the 2% target the Federal Reserve has set, but offset by very low job growth, which indicates a cooling economy.

Critics have noted Powell and the FOMC cut interest rates in September 2024 during the presidential campaign, when inflation data was very similar and the economy was adding more jobs.

In August 2024, the economy added about 142,000 jobs. Meanwhile, August 2025 jobs numbered 22,000, one of the weakest showings in four years.

But the cut this month is not likely to mollify Trump, who has argued for a more aggressive attack on interest rates to excite the economy.

“Our Fed Rate is AT LEAST 3 Points [300 basis points] too high,” Trump said previously, noting high interest rates don’t just cool the economy but cause $360 billion annually in extra interest rate costs to the taxpayers.

The economy’s top line is still growing better than expected even as job gains lag.

After slowing in the first quarter of 2025 – printing a 0.5% GDP contraction – the second quarter rallied strong to finish at 3.3% GDP growth.

The Atlanta Federal Reserve’s forecast of GDP with just a week left in the 3^rd quarter shows growth expected to be +3%, with a current target of 3.3%.

COVID-19 lockdowns, massive stimulus spending and extraordinary monetary policies propping up the economy since 2020 make it difficult to compare GDP numbers for the last four or five years.

But given today’s absence of massive stimulus and extraordinary monetary policies to accelerate the economy, GDP numbers look robust, especially after free traders expressed errant warnings about tariffs damaging the economy.

Analysts from investment firm Raymond James said despite this cut, the Fed’s updated projections show evidence for the decision for a minor cut is as much about managing risk than recognizing deep economic deterioration.

“[The] decision, along with the possibility of two more cuts this year and another in 2026, was largely driven by recent signs of labor market weakness,” said Raymond James Chief Investment Officer Larry Adam, according to VettaFi Advisor Perspectives. “What is surprising, though, is that the Fed’s updated economic projections don’t reflect the kind of slowdown you’d typically associate with multiple rate cuts.”

The Fed is split on future rate cuts. Another Raymond James analyst told VettaFi nine FOMC members foresee one more rate cut before the year ends, while 10 members anticipate two.

GDP forecasts were modestly revised upward by the FOMC. This year’s growth estimate increased from 1.4% to 1.6%, and 2026’s edged up to 1.8%.

Unemployment projections for 2026 were slightly lowered; inflation for this year remains steady but is expected to rise slightly in 2026.

The differences among the FOMC forecast for GDP (1.6% for 2025), actual GDP results and the Atlanta Federal Reserve’s forecast – now trending combined over 2% for 2025 – illustrate the confusion and lack of consensus about how the Trump economy will play out.

Significantly, tariffs have not loomed large in the latest discussions about inflation, jobs growth, GDP or unemployment.

Image credit: The White House